Business Directories

ADB mulls sukuk, sovereign insurance product

Sydney, December 16, 2013

The Asian Development Bank (ADB) is considering an Islamic bond as early as next year, plans which could evolve into a regular issuance programme and an insurance product to help member countries offer sukuk of their own.

The Manila-based development lender is building strong links with Islamic finance, holding its first conference on the subject last month as part of efforts to boost financial inclusion and promote financial stability in member countries.

A proposal will be presented to ADB management in the first quarter of next year, defining whether the AAA-rated lender aims for a single issuance or a recurring sukuk programme, Ashraf Mohammed, assistant general counsel at the ADB, told Reuters.

"It's early days but one would hope it's more than just a one-off. I am hopeful we can make headway in 2014."

ADB is dedicated to reducing poverty in Asia and the Pacific through inclusive and environmentally sustainable economic growth and regional integration. In 2012, ADB assistance totaled $21.6 billion, including co-financing of $8.3 billion.

The proposal would look at whether the sukuk is set up on a standalone basis or as part of one of its existing bond programmes, said Mohammed.

"It really depends on how we structure it. We may have to do a separate sukuk programme - separate from existing bond programmes."

Identifying financing projects in member countries, either from the government or private sectors, would then determine the size and tenor of a potential sukuk, he said.

Some of the countries the ADB would work with in this area include Pakistan, Bangladesh, Indonesia, the Philippines, the Maldives and several central Asian countries, he added.

The ADB would then consider an insurance policy designed to boost the credit rating of sukuk from sovereign issuers, mirroring a product developed by a unit of the Islamic Development Bank (IDB).

"This is something the ADB is also considering," said Mohammed, adding the ADB had already worked on a partial credit guarantee with the IDB for a project in Pakistan in 2012, which could serve as a basis for the product.

TEST

Sukuk, investment certificates which follow religious guidelines such as bans on interest and monetary speculation, have grown in prominence as a funding tool beyond the industry's core markets of the Middle East and Southeast Asia.

Britain, South Africa and Hong Kong are actively considering issuance of their own, but an ADB sukuk would test whether the Islamic finance industry can cater to an issuer known for prioritizing pricing of its borrowings.

"Being a development bank, we want to use resources effectively. By definition we are a very conservative organisation," Mohammed said.

A maiden sukuk from the ADB, however, could open the door to issuance in multiple jurisdictions, tenors and currencies.

Last year, the ADB completed 77 borrowing transactions, raising $13.2 billion in long- and medium-term funds, compared with $14.0 billion in 2011. The new borrowings were raised in eight currencies, with maturities ranging from 1 to 30 years.

ADB pursues a strategy of issuing liquid benchmark bonds to maintain a strong presence in key bond markets; but it also seeks to develop domestic capital markets of member countries through local currency borrowings.

The ADB estimates its annual borrowing needs at between $14 billion to $16 billion over the next three years. – Reuters